2016 was a tough year for healthcare stocks. Drug companies were political footballs most notably from then presidential candidate Hillary Clinton. Donald Trump’s election was supposed to bring relief to the sector’s stocks. To the contrary, President Trump picked up where Clinton left off, and the much-anticipated relief for investors hasn’t yet materialized.
Trump recently made new headlines with his attacks on pharma product pricing. This rekindled the toxicity of the sector stocks to most investors. Few experts want to recommend a stock then see their investment get an instant buzz-cut from a negative inflammatory tweet.
Today I want to trade from the other side of the fear. I do recognize that drug companies could still face Trumpian tribulations. But I also realize that Trump is a business person first, so he won’t likely destroy the sector that constitutes a large portion of market cap.
Buying Trump fear so far this year has yielded me profits from buying dips in quality stocks that were hit by Trump tweets. Case in point was Lockheed Martin Corporation (NYSE:LMT) and their issues with F-35 pricing.
Today I want to look at some trades to ride a bounce in the unloved pharma sector.
Trades for Profits in 3 Months: Biogen (BIIB)
Biogen Inc (NASDAQ:BIIB) stock price was not immune to the sector-wide woes. But on the positive side, BIIB stock has defended current levels well. This builds consolidation zones that usually serve as bases for bounces.
Assuming that no fundamental bombshells are due soon, I am willing to bet that BIIB will revert higher to the mean and retest $280 per share.
The Trade: Buy BIIB Mar debit call $265/$270 Mar spread. This is a bullish trade for which I pay $2.50 per contract to open. This is my maxim potential loss for the opportunity to double my money if, in the next 40 days, Biogen stock rallies past my spread.
Trades for Profits in 3 Months: iShares Nasdaq Biotechnology ETF (IBB)
I usually like to sell downside risk to limit my out-of-pocket risk when buying spreads. In this case, I chose to do it against an exchange-traded fund to diffuse the BIIB-specific headline risk.
iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) has a similar technical structure to Biogen at these levels. Higher lows knocking on the roof often result in breaking the roof and overshooting higher. Usually a simple IBB debit call spread near the money would capture the move, but in this case I will use the IBB as the bank for my BIIB trade.
The Bank: Sell IBB Jun $240/$235 credit put spread. This is a bullish trade for which I collect 70 cents per contract to open. This trade would yield 15% on money risked with a 90% theoretical chance of success. I need IBB to stay above $240 through mid June.
Trades for Profits in 3 Months: Gilead Sciences (GILD)
Gilead Sciences, Inc. (NASDAQ:GILD) stock price has been under pressure not though fault of its own but rather a sector malaise. It has been bouncing along a long-term pivot level dating back to October 2013. GILD has an earnings report due soon and that adds a short-term gambling flare to my trade. Reactions to earnings are often not dependent on earnings quality.
In this case, I believe that Wall Street will need a really bad report to sell GILD stock past its long-term support zone. So, as long as Gilead delivers no shockingly bearish news, the technical coil that exists in the stock should cause a rally to retest another pivot level around $80 per share.
The Trade: Buy GILD Mar $72.50/75 debit call spread. This is a bullish trade for which I pay 90 cents per contract to open. To lower my out-of-pocket risk, I can sell GILD Aug $50 put. This is also a bullish trade for which I collect 50 cents per contract to open.
As long as GILD stays above my sold risk, my call profits can be at a zero cost basis. If GILD falls below my put, sold I would be forced to buy GILD stock at a 20% discount from current price. So, I only sell naked puts if I am able and willing to own the stock at the strike sold.
I am not required to hold any options trades through expiration. I can close any of them at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
